Cocrystal Pharma, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Cocrystal is a clinical-stage biotechnology company developing antiviral candidates for hepatitis C, norovirus, and influenza. It had no approved products and no product-sales revenue; reported revenue was grant revenue.
Financial results
Amounts in $ millions, except per-share data. Balance-sheet figures are as of the dates shown.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Grant revenue | $0.027 | $0 | $0.053 | $0 |
| Research and development expense | $1.946 | $0.888 | $3.505 | $1.853 |
| General and administrative expense | $1.898 | $0.499 | $2.536 | $1.066 |
| Operating loss | $(3.817) | $(1.387) | $(5.988) | $(2.919) |
| Net income (loss) | $(2.623) | $4.730 | $(19.165) | $4.357 |
| Basic loss per share | $(0.00) | $0.01 | $(0.03) | $0.01 |
- Cash and liquidity: Cash and cash equivalents were $15.781 million at June 30, versus $3.970 million at December 31, 2014. Current assets were $16.329 million and current liabilities $7.349 million.
- Cash flows, six months: $4.090 million used in operating activities; $0.019 million provided by investing activities; and $15.882 million provided by financing activities, principally private-placement proceeds. Cash increased $11.811 million.
- Other balance-sheet items: Total assets were $269.129 million and total liabilities $72.606 million. Liabilities included $6.130 million of warrant liabilities and a $65.195 million deferred tax liability. The filing reports a mortgage note receivable, not mortgage debt; no conventional borrowings are identified.
- Margins: Product-sales margins are not meaningful because the company had no product sales. Operating expenses substantially exceeded grant revenue.
Material changes and unusual items
- Operating expenses rose year over year: Q2 R&D increased 119% and G&A increased 280%; six-month increases were 89% and 138%, respectively. The filing attributes R&D growth mainly to personnel, lab services, manufacturing, and pharmacology/toxicology work; G&A growth mainly to compensation and non-cash stock-based compensation.
- Six-month net loss included $11.528 million of non-cash expense from the change in fair value of derivative liabilities and a $1.685 million realized loss related to MusclePharm shares held in escrow. Management says investors should focus on operating loss because warrant remeasurement is non-cash. The quarter had a $2.887 million warrant-related gain as the share price declined.
- The company raised approximately $15.862 million in 2015 private-placement proceeds. Series A and B preferred shares converted into common shares in March; common shares outstanding rose to 694.375 million at June 30. The company also reported 18.389 million warrants exercised during the first half and substantial outstanding options and reserved plan shares.
- At June 30, the company recorded a full allowance against the escrow-related receivable for MusclePharm shares after the escrow agent released the remaining shares to MusclePharm; recovery is described as highly uncertain and a loss as probable.
Outlook, risks, and contingencies
- Management expects substantial operating losses and negative operating cash flows to continue during clinical development, and R&D expenses to increase as preclinical work expands. No specific revenue, earnings, or clinical milestone guidance is provided.
- Management stated cash on hand of $14.7 million as of August 13, 2015 was expected to fund the current operating plan for at least 12 months. The company may need additional capital; availability and terms are uncertain, and equity financing could dilute shareholders.
- Key cited risks include product-development setbacks, third-party manufacturing problems, availability of financing, and difficulty remediating financial-reporting controls.
- Disclosure controls were deemed ineffective, with a material weakness involving financial-statement review and documentation, disclosure procedures, and segregation of duties. Remediation was in progress and incomplete as of August 14, 2015.
- A lawsuit seeks recovery on a purported $295,000 promissory note allegedly executed by a subsidiary in 2007; the company intends to defend it. A separate eviction-related lawsuit was withdrawn without prejudice in February 2015.
- Shareholders authorized a possible reverse split at a ratio between 1-for-5 and 1-for-8, but the company had not decided whether or when to implement it. A new equity incentive plan was adopted in June.
Important facts for investors to verify
- Whether cash and the stated 12-month runway remain adequate as development spending increases, and what financing may be needed.
- Progress and costs of antiviral development, including manufacturing and preclinical studies; the filing provides no product-sales revenue or detailed clinical milestone guidance.
- How warrant fair-value movements and the MusclePharm escrow dispute affect reported results and potential recoveries.
- Remediation of the disclosed material weakness and effectiveness of subsequent financial reporting controls.
- Potential dilution from outstanding options, warrants, future plan awards, and any reverse split or additional equity issuance.